Profit-sharing Incentive Structures and Managerial Behavior
Answer 1
If a manager is given a share of profits, there is a chance that the manager will manipulate profits to maximize his or her wealth. The manager may try to increase the profit by writing off assets for one period, manipulating the expenditure, or manipulating accounting numbers.
According to Positive Accounting Theory, principals should expect managers to be opportunistic until managers do not try to generate an opportunity to make their financial benefits. It is expected that once profit-sharing incentive structures are taken is considered, then managers may seek to increase the bonus amount and their financial gains (Avelé, 2014). One alternative is to work more, but there is also the probability that they may manipulate reported earnings by using accounting processes that produce a better financial outcome.
Therefore, there is a requirement to limit the managers’ capacity to affect future profitability. Required to make a contractual agreement with the manager with restrictions that do not allow them to manipulate the profit of the company.
Answer 2
Political costs are the expenses that some outside groups may be capable to enforce on the corporation as a consequence of their actions. For instance, the costs of a community pressing the government to reduce a non-profit organization’s subsidy support, or the expenses of labor unions actively working to raise their employees’ pay (Santoso, & Sebayang, 2017).
Managers can decrease political expenses by using an accounting system, according to the PAT. In this regard, the political process is similar to the market process. Managers must exercise prudence regarding accounting profits due to the high expense of intelligence and scrutiny, and political parties must accept a reasonable degree of ex-post opportunism.
Answer 3
As per the case of Babcock & Brown, the debt covenant set was based on market capitalization rather than on total liabilities or tangible assets as market capitalization is often considered a parameter to assess the solvency and stability of the business. The management of Babcock & Brown agreed to market capitalization as a condition considering the good Market reputation of the company and also the level of stability in their stock values. However, the management did not take into account the fluctuations which are quite normal in the stock market. Further, the bank agreed with the market capitalization assumption as the business had positive stock values and consistent growth was achieved by the business. Further, the debt covenant provided a sense of security for the banks and thereby the condition was accepted within the debt contract of the business (Wiratama, & Asri, 2020).
Answer 4
Politicians have concentrated on high-profit enterprises rather than small businesses, as evidenced by a higher level of governmental scrutiny. Firms aim to lower their earnings by employing various accounting strategies, which helps them avoid paying a significant political cost to political organizations. The business has two options, the capitalization approach, and the expensing strategy. As a result, in this scenario, the firm opts for a capitalizing approach (Nasution et al., 2022). The capitalization approach allows the corporation to invest in securities while simultaneously decreasing earnings by displaying expenses such as dividends given to current shareholders and interest paid on debt, which reduces profits while also lowering political costs.
Limiting the Managers’ Capacity to Affect Future Profitability
The debt covenant theory and the political cost hypothesis are two of Positive Accounting’s theories. The corporation can minimize earnings on its financial statement by using the debt covenant strategy.
Answer 5
Accounting standards give managers some flexibility in selecting from a variety of accounting practices, but they also allow for opportunistic behavior. Managerial accounting decisions are analyzed using the accounting framework in place, which means that accounting decisions are made based on the available accounting standards. Outsiders can see initial decisions and alterations in accounting principles, but modifying accounting estimates allows management more flexibility since an external viewer cannot easily discover when such a decision is used to control income.
As a result, the strategy taken is incompatible with PAT’s opportunistic viewpoint.
As a corporation enters into a bad financial situation, potential investors may move funds to real owners, and the government may enhance tax collection. As a result, the firm may violate its debt-to-asset limitations, causing it to fail on its debt obligations technically. Managers may be tempted to overestimate assets or understate obligations in order to save the firm from going bankrupt. The use of income-increasing accounting strategies will help debt constraints lose their grip. This will be compatible with the opportunistic viewpoint outlined by Watts and Zimmerman, as well as the Debt Hypothesis. According to the debt theory, indicate that the higher the debt/equity ratio of a company, the more probable it is for managers to utilize accounting practices to supplement rising revenue. The strict covenant limits are the cause of a higher likelihood of covenant violations and misuse of lineant accounting procedures.
Answer 6
A. The remuneration structure at Bank of Queensland Ltd is described (Section 3. Remuneration outcomes) as balancing fixed and variable components. These components take into consideration the company’s unique overall risk and ensure that the company’s and individual performances are closely aligned.
(boq.com, 2022)
Remuneration for Senior Executives consists of the following elements:
- Fixed reward for FY21, which includes a base income and company payments to superannuation.
- Non-monetary and other short-term advantages will be offered in the fiscal year 2021.
- Any variable remuneration was forfeited in the financial year 2021.
(boq.com, 2022)
B.By successfully motivating dedication, professional progress, and the adoption of behaviors that are judged relevant in accomplishing the corporate purpose, the company and individual performance are connected to pay. Total remuneration is made up of a well-balanced combination of fixed and variable elements with the goal of discovering the measures that best indicate long-term potential. Short-term compensation, Fixed remuneration, non-monetary benefits, variable remuneration to managers, and compensation are all included in this package.
Performance, knowledge, degree of accountability and consistency in the organization’s progress are used to determine the remuneration at Bank of Queensland Ltd.
Components would be expected to align the interests of the managers
- The purpose of fixed pay is to compensate for professional and management technical abilities.
- Non-monetary compensation is an important element of the total compensation package, and it is mostly welfare and social security in nature. Short-term variable remuneration incentivizes the success of financial and tactical goals, as well as the implementation of corporate leadership-model-compliant behaviors.
- For executives with strategic positions, strong performance, and market volatility, variable remuneration for sustaining managers assures retention measures.
References
Avelé, D. (2014). Positive accounting theory: theoretical and critical perspectives. International Journal of Critical Accounting, 6(4), 396-415.
boq.com. (2022). Annual report 2021 [Ebook]. Retrieved 28 April 2022, from https://www.boq.com.au/content/dam/boq/files/shareholder-centre/financial-results/2021/annual-report-2021.pdf.
Nasution, S. T. A., Putri, R. F., Muda, I., & Ginting, S. (2020). Positive accounting theory: Theoretical perspectives on accounting policy choice. In Proceedings of the 1st Unimed International Conference on Economics Education and Social Science (UNICEES 2018) (pp. 1128-1133).
Santoso, M. R., & br Sebayang, M. M. (2017). A glimpse of positive accounting theory (PAT). Junior Scientific Researcher, 3(2), 70-77.
Watts, R. L., & Zimmerman, J. L. (1990). Positive accounting theory: a ten-year perspective. Accounting review, 131-156.
Wiratama, R., & Asri, M. (2020). A literature review: Positive accounting theory (PAT). Available at SSRN 3523571
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